Higher US bond yields draw out Treasury support

We have written a few blogs over the years that explain why we look at charts and my background as a bond analyst (including bond and currency prop trading at BoA and AEB in London, fund advisory and current work with my Tricio partners).

Our weekly Spotlight for the week of 24^th August will cover the bond market implications of Treasury Secretary Bessent’s support of the bond market, with links to previous operations and research papers. For a free copy please email us at info@tricio-advisors.com.

This blog is simply a restating of our view that currency markets are great judges of policy action.

By stating on Wednesday that Treasury was willing to double the amount of ‘liquidity management’ bond purchases for a few months, Bessent has effectively capped long-end yields (weekly 30-yr. bond yield chart below) for now. Rather than threatening to break above 5.30% on a sustained basis for a potential run to 6% and higher, the focus is on whether the bond yield can drop to 5% for a move to the 50-week moving average near 4.88% and lower. In other words, is the Treasury action enough to quell bond market fears over rising inflation (energy price rise as US war on Iran extends), rising debt loads (US federal government debt crossed the $40 trillion threshold this week) and the increased debt issuance from AI companies.

Our view is that a few extra billion of bond buybacks for a limited amount of time is not a big deal – more of a move to provide liquidity and protest high yields at a time of stress. The FX market (EUR/USD weekly chart below) though suspects a rat.

The chart shows the EUR/USD pushing above $1.16 so far, and we think that $1.20+ will come under pressure soon. The falling blue lines will be key to clear for our $1.25/$1.30 view and could set up $1.40 and higher. The rationale is that if Treasury is trying to cap long-term yields and the Fed is trying to let the market tighten for them in order to avoid raising rates, what is stopping inflation pressures from rising further? This is why gold prices bounced on Wednesday as the concern that the US government was going to debase ‘fiat money’ increased again.

We don’t favour a banana republic (apologies to all of the banana republics out there…) policy stance from the US, but trying to ignore higher inflation risk whilst capping bond market sell-offs never ends well. Currency markets often are the pressure relief valve.

Fed Chair Warsh would love to say that the Fed is going to stay in its lane and do its job at his Jackson Hole speech next week. The market would like it if he laid out plans for a rate hike or two, but he doesn’t want to give forward guidance so the market may be disappointed.

The risk is that the FX market will think that the Fed Chair is a political appointment and talks tough on inflation but also mentions working with Treasury and is not going to raise rates. The softer USD trend may be set to really accelerate. Interesting times!

As faithful readers of our ‘Currency Matters’ and monthly insights publications and listeners to our currency podcasts (available on Spotify and other platforms) and watchers of our YouTube videos know, we have been beating the USD bear drum since late 2022 vs. the EUR and GBP and other currencies. Early days here, but USD bears may be finding their honey jar over the coming months if the market takes the view that short rates won’t be hiked and the government may try and cap long rates.

Gerry Celaya, Chief Strategist